Kraft 2013 Annual Report Download - page 59

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Stock Options:
Stock options are granted with an exercise price equal to the market value of the underlying stock on the grant date,
generally become exercisable in three annual installments beginning on the first anniversary of the grant date, and
have a maximum term of ten years.
We account for our employee stock options under the fair value method of accounting using a modified Black-
Scholes methodology to measure stock option expense at the date of grant. The fair value of the stock options at
the date of grant is amortized to expense over the vesting period. We recorded compensation expense related to
stock options of $18 million in 2013 and $5 million in 2012. The deferred tax benefit recorded related to this
compensation expense was $6 million in 2013 and $2 million in 2012. The unamortized compensation expense
related to our outstanding stock options was $17 million at December 28, 2013 and is expected to be recognized
over a weighted average period of two years. Our weighted average Black-Scholes fair value assumptions were as
follows:
Risk-Free
Interest Rate Expected Life Expected Volatility Expected Dividend Yield Fair Value at Grant Date
Kraft Foods Group grants
2013 1.04% 6 years 19.40% 4.26% $ 4.41
2012 1.16% 6 years 20.13% 3.08% $ 4.78
2011 2.34% 6 years 18.92% 3.72% $ 3.84
The risk-free interest rate represents the constant maturity U.S. government treasuries rate with a remaining term
equal to the expected life of the options. The expected life is the period over which our employees are expected to
hold their options. Due to the lack of historical data, we use the Safe Harbor method which uses the weighted
average vesting period and the contractual term of the options to calculate the expected life. Volatility reflects a
blended approach which uses historical movements in our stock price and in our peer group for a period
commensurate with the expected life of the options. Dividend yield is estimated over the expected life of the options
based on our stated dividend policy.
The stock option awards granted in 2012 and 2011 were prior to the Spin-Off. Therefore, we estimated the value of
those awards based on International’s share price and assumptions.
A summary of stock option activity related to our shares for both our and International employees for the
year ended December 28, 2013 is presented below. Stock option activity for the year ended December 28, 2013
was:
Options Outstanding
Weighted
Average
Exercise Price
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
Balance at December 30, 2012 17,185,781 $ 32.45
Options granted 3,035,826 47.15
Options exercised (3,151,538) 30.56
Options canceled (749,414) 38.80
Balance at December 28, 2013 16,320,655 35.26 7 years $ 300 million
Exercisable at December 28, 2013 9,317,835 30.91 6 years $ 212 million
All awards granted prior to the Spin-Off have been adjusted to reflect the conversion as of the Spin-Off. With
respect to the International stock options granted prior to the Spin-Off, the converted options retained the
vesting schedule and expiration date of the original stock options.
The total intrinsic value of options exercised was $69 million in 2013 and $8 million in 2012 subsequent to the Spin-
Off. Cash received from options exercised was $96 million in 2013 and $15 million in 2012. The incremental tax
benefit realized for the tax deductions from the option exercises totaled $20 million in 2013 and $1 million in 2012.